A core part of my investment mantra is to find the best UK shares that offer me consistent returns as well as growth prospects. I believe tech stock Kainos (LSE:KNOS) could fit the bill. Here’s why I’m bullish on the shares.
IT services
As a quick introduction, Kainos provides information technology services to its customers in the private and public sectors. The business operates via two divisions, which are Digital Services and Workday Practice. The former operates around development of software and other digital solutions and the latter around cloud-based software for human capital management, financial management, and planning.
So what’s the current state of play with Kainos shares? Well, as I write, they’re trading for 1,463p. At this time last year, the stock was trading for 1,780p, which is a 17% drop over a 12-month period.
UK shares have risks
Kainos helps lots of key public and private sector clients, and many governments too. A big risk that any software provider faces is that of cyber security threats. These threats come in many forms, such as hacking, loss of data, or even breach of data protection. If a security breach were to occur, the organisation using the software could suffer but the software provider, in this case Kainos, could suffer from reputation, financial, and even legal repercussions. I would also imagine the share price and investor sentiment could be negatively affected too.
Despite Kainos shares dropping in recent months, the shares do also look a tad expensive to me on a price-to-earnings ratio of close to 48. This makes me question if growth could already be priced in. Furthermore, if I were to buy shares right now, would I be getting value for money?
The investment case
Moving away from the bearish aspects, let’s look at some positives. Firstly, I am impressed by Kainos’ client list. It has several government contracts, which tells me two things. Firstly, governments trust Kainos’ offering to help them adopt digital technology, which I think is a ringing endorsement. Second, government contracts often run for a long period, which means this is consistent and recurring revenue for Kainos.
Next, the tech market in general is a growing one, especially when it comes to digital solutions and adopting a digital approach. I also believe the pandemic sped up digital adoption for businesses and consumers alike. This should benefit Kainos, and many other UK shares, and could support future growth too.
Let’s look at Kainos’ performance then. I am aware that past performance is not a guarantee of future performance, however. Looking back, I can see Kainos has impressively grown revenue and profit for the past four fiscal years.
Finally, consistent performance can lead to investor returns in the form of dividends. Kainos shares tick this box here through dividend payments. At current levels, Kainos’ dividend yield stands at 1.5%. This is a little below the FTSE 250 average of just under 2%. I wouldn’t be surprised to see this increase in the future as performance and growth continues. I am conscious that dividends are never guaranteed, however.
Overall, I like Kainos shares and would be willing to add some shares to my holdings. I believe it is one of a number of UK shares that fit my investment strategy of growth, while providing consistent returns for my portfolio in the long term.
